Tsunami of people going broke from shutdown

Paige Marta Skiba For The Associated Press

Published
4:38 am CDT, Saturday, May 16, 2020

A man holds an umbrella while he walks in front of an auto repair shop in Wheeling. Nearly 3 million laid-off workers applied for U.S unemployment benefits last week as the COVID-19 pandemic forced more companies to slash jobs, even though most states have begun to let some businesses reopen.

A man holds an umbrella while he walks in front of an auto repair shop in Wheeling. Nearly 3 million laid-off workers applied for U.S unemployment benefits last week as the COVID-19 pandemic forced more

A man holds an umbrella while he walks in front of an auto repair shop in Wheeling. Nearly 3 million laid-off workers applied for U.S unemployment benefits last week as the COVID-19 pandemic forced more companies to slash jobs, even though most states have begun to let some businesses reopen.

A man holds an umbrella while he walks in front of an auto repair shop in Wheeling. Nearly 3 million laid-off workers applied for U.S unemployment benefits last week as the COVID-19 pandemic forced more

Bankruptcy can discharge or erase many types of debts and stop foreclosures, repossessions and wage garnishments.

But research shows the bankruptcy system is difficult to navigate even in normal times, particularly for minorities, the elderly and those in rural areas.

COVID-19 is exacerbating the existing challenges of accessing bankruptcy at a time when these vulnerable groups — who are bearing the brunt of both the economic and health impact of the coronavirus pandemic — may need its protections the most.

If Americans think about turning to bankruptcy for help, they likely will find a system that is ill-prepared for their arrival.

There are many benefits to filing bankruptcy.

For example, it can allow households to avoid home foreclosure, evictions and car repossession. The “automatic stay” triggered at the start of the process immediately halts all debt collection efforts, garnishments and property seizures. And the process ends with a discharge of most unsecured debts, which sets people on a course to regain some financial stability.

The process helps the average household erase about $50,000 in unsecured debt – such as payday loans and credit card and medical bills.

But filing for bankruptcy comes with costs. In a Chapter 7 case, known as a liquidation when a debtor’s property is sold and distributed to creditors, households may be required to surrender some of their assets. The post-bankruptcy path to financial stability often is bumpy.

In a Chapter 13 reorganization case, households must commit to making monthly payments equal to their disposable income for three to five years. But the majority of people, unfortunately, are unable to keep up with their payments for that long and do not end up eliminating their debts.

Nonetheless, struggling Americans may find bankruptcy one of few viable options to address their worsening money problems, particularly as the pandemic shows no signs of ending soon.

In the last 10 days of March, when states began issuing such orders, we found that Chapter 13 filings fell 45% compared with the last 10 days of March 2019, based on a docket search on Bloomberg Law. Filings in all of April — when most states were under lockdown — plunged 60%, while Chapter 7 filings were down 40%.

This suggests that there’s pent-up demand for bankruptcy protection — in terms of what would normally be expected — on top of the impact from the coronavirus recession.

The middle of a pandemic may not be the best time to file for bankruptcy.

But with limited debt forbearances, more than 30 million people out of work and insufficient employment aid, we expect to see a great deal more distress — both financial and otherwise — in the coming months.

And without more aid to individuals soon, U.S. bankruptcy courts likely will face a tsunami of filings, not only from average Americans but companies as well. This will clog up the system, which is why many experts are calling on Congress to shore up bankruptcy courts with more judges and funding.

But a first priority should be shoring up individuals, for whom bankruptcy is seen as a last resort. If more aid isn’t forthcoming, the bankruptcy system may be too overwhelmed to handle even that.